The company with a market value of about $430 million was
bailed out by six financial firms in August after losing $457
million in a trading error. Chicago-based Getco LLC, one of the
rescuers, and Virtu Financial LLC in New York are among the
likely bidders, said the person, who requested anonymity because
the negotiations are private. The Wall Street Journal reported
Nov. 23 that Knight expected offers for its market-making unit.

An acquisition would end Knight’s independence following
more than a decade in which Chief Executive Officer Thomas Joyce
built it into one of the biggest market makers, executing about
10 percent of U.S. share volume. Joyce sent an e-mail to
employees over the weekend saying capital levels are strong and
no deal will be done unless it makes sense for the company,
according to a person briefed on the matter who asked not to be
named.

“Getco and Virtu would definitely be interested in the
market-making business and the retail order flow,” Richard Repetto, a New York-based analyst at Sandler O’Neill & Partners
LP, said in a Nov. 24 phone interview. “If they sold the
market-making business, it would make sense to sell
simultaneously the other assets to them or somebody else. They
don’t have a company once they sell that business. It’s the
mainstay.”

This Week

Kara Fitzsimmons, a Knight spokeswoman, Sophie Sohn, a
spokeswoman for Getco, and Douglas Cifu, president and chief
operating officer of Virtu, declined to comment.

Knight surged 16 percent to $2.89 as of 3:39 p.m. in New
York, poised for the biggest gain since August.

Offers for Jersey City, New Jersey-based Knight are
expected this week with negotiations for an acquisition
occurring as early as next weekend, according to the person. The
successful bidder would emerge as a bigger competitor in the
business of providing buy and sell requests for stocks and other
securities and reap cost benefits, the person said.

Knight dodged bankruptcy in August when six financial firms
provided $400 million to restore the company’s capital after the
trading malfunction, when incorrectly installed software caused
it to bombard U.S. exchanges with unintended orders. The
investors, which received three board seats as part of the
transaction, control Knight through preferred stock convertible
into more than 70 percent of the common shares.

Getco Filing

Getco said in a filing this month that it will consider
transactions including buying or selling Knight shares.

Knight has transformed over the last decade from mainly
handling orders from individuals sent by brokers into a
financial services company with institutional clients,
electronic trading and businesses in fixed income and currency.

It owns the Hotspot FX and BondPoint platforms, provides
research and asset management and got into the reverse mortgage
business in 2010. Knight had more than 1,400 employees at the
end of last year, it said in a filing.

Knight doesn’t need a deal and would only entertain
transactions that made sense for the company and its business
units, according to Joyce’s e-mail. His contract expires at the
end of the year.

The company had $420.8 million in cash and equivalents as
of Sept. 30, according to its earnings report released last
month. The company posted a third-quarter net loss of $6.30 a
share, the widest since at least 2001.

Market Makers

Virtu, Getco and Knight are automated market makers. While
Getco and Virtu operate across asset classes mainly on exchanges
and similar platforms around the world, Knight is also a
wholesale market maker that services retail brokers including
Fidelity Investments and TD Ameritrade Holding Corp. by
executing buy and sell orders for individuals.

In an Aug. 6 interview, Daniel Coleman, chief executive
officer of Getco, said Knight’s disappearance wouldn’t have
yielded a “better world” for Getco. Without Knight’s ability
to provide liquidity, “it would be more expensive for everyone
to trade,” he said in a phone interview.

“In some ways Knight’s a competitor, in some ways they’re
a client, in some ways we’re their client,” Coleman said. “But
at the end of the day the liquidity they provide and I think the
liquidity we provide probably makes both of us better. This is
in our strategic interest to make sure Knight stays viable.”

Along with Getco, founded in 1999, the firms that provided
capital to Knight in August included Blackstone Group LP (BX),
brokerages Stifel Nicolaus & Co. and Ameritrade and investment
banks Stephens Inc. and Jefferies Group Inc. Virtu, based in New
York, does not have a stake in the company.

Knight shares, which closed at $10.33 the day before the
trading error, ended trading last week at $2.49.